How to categorise business expenses: a practical guide to your chart of accounts

Every transaction in your books needs a label. That label, the category, decides where the cost appears in your profit and loss, how it is shown on your tax return and whether it can be claimed at all. Choose well and your reports tell you something useful. Choose carelessly and you end up with a pile called "miscellaneous" and an accountant who has to unpick it. This guide shows you how to build a sensible list of categories, how to put each transaction in the right one and where the tricky cases are.

Why categories matter

Tax. Sole traders report expenses under specific headings on the Self Assessment return, and from April 2026, Making Tax Digital quarterly updates use similar categories. If your categories match, the figures flow straight through.

Insight. Seeing that you spent £8,000 on advertising and £3,000 on subscriptions tells you where the money goes. A single "expenses" line tells you nothing.

Accuracy. Good categories help you spot errors: a car repair coded to stationery stands out when the categories are specific.

Speed. Clear categories and bank rules make monthly bookkeeping much faster. See our monthly bookkeeping checklist.

The standard categories

A good starting list for a UK small business follows the headings on the sole trader tax return, with a few additions for companies.

Category	What goes in it
Cost of goods sold	Stock, raw materials, goods for resale, subcontractor costs directly tied to sales
Wages and staff costs	Salaries, employer National Insurance, pensions, freelancers
Car, van and travel	Fuel, mileage, parking, public transport, accommodation on business trips
Premises costs	Rent, rates, utilities, cleaning, repairs to business premises
Repairs and maintenance	Maintenance of equipment and property
Admin and office costs	Phone, internet, stationery, postage, software subscriptions
Advertising and marketing	Ads, website, promotional items, business cards
Interest and bank charges	Loan interest, overdraft fees, card processing fees
Professional fees	Accountancy, bookkeeping, legal fees, memberships
Insurance	Business insurance policies
Training	Courses that maintain existing skills
Other expenses	Genuinely unclassifiable items, kept small

Keep the list short. Fifteen to twenty categories is plenty for most small businesses. Too many categories make coding slower and less consistent.

How to decide where something goes

Ask three questions in order.

1. What was it for? The purpose of the cost, not the shop it came from. A meal on a business trip is travel, not food.
2. Is it a day-to-day cost or something that lasts? A laptop is an asset, not a stationery cost.
3. Is it wholly for business? If not, record only the business share.

Capital versus revenue

Revenue expenses are everyday costs consumed within the year, such as rent, fuel, stationery and subscriptions. Capital expenditure buys something that lasts, such as a van, machinery, computers or tools. Capital items are recorded as assets and relieved through capital allowances rather than as ordinary expenses, although most can be deducted in full in the year of purchase through the Annual Investment Allowance, up to £1 million. Under the cash basis for sole traders, you can deduct most capital purchases when paid, with exceptions for cars, land and buildings. The key is to record them separately so your accountant can claim the right relief. Our post on sole trader expenses explains what is allowable.

Mixed-use items

Many costs are partly business and partly private.

Mobile phone. Claim the business proportion, based on itemised bills or a reasonable estimate.

Home office costs. Use the simplified flat rate or a proportion of actual costs. See working from home expenses.

Car. Use simplified mileage or the business proportion of actual costs. See business mileage claims.

Broadband. Claim the business proportion.

Record the full invoice, then post the private share to drawings (sole traders) or the director's loan account (companies), or post only the business share to the expense. Whichever you choose, be consistent.

Items that are not expenses

Some payments look like expenses but are not.

• Drawings and salary to yourself as a sole trader are not expenses.
• Loan repayments: only the interest is an expense, the capital repayment is not.
• VAT paid to HMRC: this is a liability, not an expense, for VAT-registered businesses.
• Income tax and Corporation Tax: not business expenses.
• Transfers between your own accounts: not an expense or income.
• Fines and penalties: not allowable, but should still be recorded, in a non-deductible category.

Examples

Transaction	Category
Petrol on the way to a client	Car, van and travel
Annual accounting software subscription	Admin and office costs
Facebook ads	Advertising and marketing
New laptop, £900	Capital: equipment
Accountant's fee	Professional fees
Monthly bank charge	Interest and bank charges
Stock bought for resale	Cost of goods sold
Lunch with a client	Not allowable: record as non-deductible
Train ticket to a client	Car, van and travel
Co-working desk	Premises costs

Using bank rules

Accounting software can learn your habits. Create a rule for each recurring transaction, for example "any payment to a particular software supplier goes to admin costs". Rules do most of the categorising, and you review the rest. Check the automatic suggestions occasionally, because rules can drift out of date. See our post on bank feeds versus manual entry.

Receipts and evidence

Every categorised expense should have a receipt or invoice attached. A neat category without evidence is only half a record. See how to keep receipts for HMRC.

Reviewing your categories

Once a quarter, run a profit and loss by category and look for oddities: a category that is unusually high or low, anything left in "uncategorised" and "other". If "other" is large, you need a new category. If a category is rarely used, merge it. Our bookkeeping clean-up service rebuilds a messy chart of accounts.

Common mistakes

• Using the shop name rather than the purpose
• Putting capital items through day-to-day expenses
• Claiming the full cost of mixed-use items
• Leaving items in uncategorised
• Creating too many near-duplicate categories
• Recording loan repayments as expenses
• Not separating non-deductible items

Keeping categories consistent over time

The biggest threat to good categories is drift. In month one you code a software subscription to admin costs; in month four a different person codes a similar one to advertising. Reports quietly stop meaning anything. Avoid this by writing a short coding guide: one line per category with examples, and a note on the awkward cases such as mixed-use items. Share it with anyone who touches the books. Review the profit and loss by category each quarter and look for items that seem to be in the wrong place, and use bank rules so that repeating transactions are always coded the same way. A consistent chart of accounts is also what makes quarterly Making Tax Digital updates fast.

Frequently asked questions

How many expense categories should I have?

Usually fifteen to twenty. Enough to be informative, few enough to use consistently.

Where do I put things I do not know how to categorise?

Use a temporary suspense category, then resolve it with your bookkeeper or accountant, rather than leaving it in "other".

Are subscriptions an expense?

Yes, software and similar subscriptions used in the business are allowable admin costs.

What is the difference between an expense and an asset?

An expense is used up in the period. An asset gives lasting benefit and is relieved through capital allowances.

Can you set up my categories?

Yes. We tidy your chart of accounts and code every transaction. Get an instant quote.